Profit is what remains when costs are subtracted from revenue. The basic formula is profit = total revenue − total cost, but the result depends on which costs are counted and where you are measuring it. Accounting profit uses explicit payments; economic profit also accounts for the value of opportunities given up. On a company income statement, gross, operating, and net profit show progressively different stages of deductions.
What is profit?
Profit is a surplus: revenue left after the costs associated with earning it are deducted. A positive result means revenue exceeded the costs included in that calculation; a negative result is a loss. Because different measures include different costs, the word “profit” is incomplete unless the measure is clear.
In a simple sales example, total revenue is the price per unit multiplied by the quantity sold. Costs may include the resources used to produce and sell the goods or services, such as materials, wages, rent, and marketing. OpenStax summarizes the formula as “Profit = Total Revenue – Total Cost” in Principles of Microeconomics 3e, section 7.1.
Accounting profit and economic profit
The key distinction is whether the calculation includes only payments made or also the value of resources the owner supplies and could use elsewhere.
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| Measure | What it subtracts | What it helps answer |
|---|---|---|
| Accounting profit | Explicit costs: actual out-of-pocket payments, such as wages and rent. | How much revenue remains after recorded payments are deducted? |
| Economic profit | Explicit costs plus implicit costs, including opportunity costs of owner-supplied resources. | Did those resources earn more in this activity than they could have earned in their next-best use? |
An owner who works in a business without drawing a salary still gives up the possibility of earning wages elsewhere. That foregone income is an implicit cost in an economic-profit calculation, even though no payment appears in the books. Economic profit is therefore a broader test of the return on resources, not simply another name for accounting profit.
OpenStax illustrates the distinction with a textbook example: revenue of $200,000 minus $85,000 in explicit costs yields $115,000 in accounting profit. If the owner gives up a $125,000 salary elsewhere, economic profit is −$10,000 after including that opportunity cost. These are illustrative teaching figures, not a statistic about actual businesses.
Types of profit on an income statement
Financial reporting uses several profit measures to show how much remains at different stages. The U.S. Securities and Exchange Commission’s Beginners’ Guide to Financial Statements describes a common sequence. Each measure answers a different question; amounts from different stages are not interchangeable.
- Net revenue: Start with sales or gross revenues and subtract returns and allowances.
- Gross profit: Subtract costs of sales from net revenue. It is sometimes called gross margin.
- Operating profit: Subtract operating expenses from gross profit. These can include administrative salaries, research, and marketing; depreciation is also accounted for in the statement sequence. This measure is before interest and income taxes.
- Net profit: Account for interest income and expense, then income tax, to reach the final profit or loss for the period. The SEC says net profit is also called net income or net earnings.
These labels do not constitute one exhaustive, universally standardized list of every use of “types of profit.” They distinguish two different questions: whether opportunity costs are included (accounting versus economic profit), and how far income-statement deductions have progressed (gross, operating, or net profit). When comparing figures, identify both the measure and the costs already deducted.
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Profit is not the same as cash flow
An income statement shows whether a company made a profit over a period; a cash flow statement tracks cash inflows and outflows. The SEC explains that the cash flow statement reconciles net income for non-cash items and changes in working capital. As a result, a reported profit does not by itself establish that the company generated enough cash during that period. Profit measures accounting performance; cash flow measures movement of cash.
What is the profit motive?
The profit motive is the incentive to earn a surplus. Profit can reward people or organizations for supplying goods and services that customers value, and the prospect of a return can encourage attention to costs, innovation, saving, and risk taking. Howard M. Schilit and Jeremy Perler describe these roles in the chapter 5 preview of Financial Statement Analysis, 5th Edition.
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Profitability can also serve as a performance measure or inform compensation claims. But that does not mean every organization or individual decision is driven solely by maximizing profit. Objectives, constraints, and the way revenue and costs are defined differ; the profit formula is a starting point, not a complete account of why an organization acts as it does.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How does the IRS distinguish a business from a hobby?
In the United States, the Internal Revenue Service considers whether an activity is a business or a hobby for federal tax purposes. This is a separate question from the general economic definition of profit. The IRS says “No one factor alone is decisive” and weighs the full facts and circumstances, including:
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- Whether the activity is conducted in a businesslike manner and accurate records are kept.
- The person’s motives, time, and effort, and whether they rely on the income.
- Reasons for losses, relevant expertise, and past success in similar activities.
- Whether the activity makes a profit in some years and whether future profit is expected, including from asset appreciation.
The IRS’s Income & expenses FAQ explains these factors. It does not make any single factor a universal economic test, and this general overview is not individualized tax advice.
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